The Odd Synchronized Rise of Gold and the USD (Here’s Why)

A rare set of circumstances has the dollar and price of gold rising together. One analyst has a theory for why it’s happening, and where gold may go from here.

Synchronized Rise of Gold and the USD

As MarketWatch’s Ivan Martchev points out, this year has seen a strange occurrence of gold rising alongside the U.S. dollar. Historically, a strong greenback has acted as one of gold’s biggest headwinds, as the metal is primarily priced in the U.S. currency.

However, this past summer, gold tested one resistance level after another, gaining as much as $300 so far this year. At the same time, the greenback continues to hover around all-time highs. To explain this phenomenon, Martchev explains how it’s important to look at the Broad Trade-Weighted Dollar Index, which takes in many more metrics than the regular DXY index.

Martchev notes that the dollar’s strength is no longer dictated solely by the Federal Reserve’s funds rate. Instead, the monetary policies of various economies across the globe have played a major role in holding the U.S. dollar up while also allowing gold to post its best performance in six years.

Negative-yielding bonds in Europe, a dismal Brexit situation and quantitative easing (QE) from the European Central Bank have all propped the dollar up. Yet these same factors are also highly beneficial for gold. The U.S.-China trade war and Beijing’s consequent devaluation of the yuan is another bullish component for the gold market, as the yuan’s depreciation pushes global central banks towards more quantitative easing. As Martchev notes, these QE programs have helped plunge various bonds into negative territory, leaving investors with less and less safe-haven options.

There is also the matter of excess fiat reserves in the global monetary system. While the ballooning of various central banks’ balance sheets, caused by central bankers purchasing their own bonds, has not yet led to an expansion of the monetary supply, gold enthusiasts remain hopeful that these money printing antics will eventually bring about hyperinflation and push gold to new highs. Although there hasn’t been a spike in inflation so far, the resulting negative-yielding bonds have proved to be enough of a booster for the gold market.

Martchev sees various venues for gold to continue its strong upwards momentum. According to him, a continuation of QE programs by the ECB and the new norm of negative-territory European bonds should lead to an additional 15%-20% gain in gold prices over the next 12 to 18 months, especially if the Federal Reserve shows an eagerness to employ QE of its own. Should a U.S. recession occur in the near-future, as many analysts and even the Fed itself have been forecasting, Martchev thinks gold will move to new all-time highs as Fed officials apply questionable policies to offset the domestic economic contraction.

Analyst: U.S. Debt and Record-Low Yields Are Driving Gold Prices

Although gold has had many drivers powering its remarkable summer upswing, Forbes contributor Frank Holmes highlights two tailwinds that could prove to be key players for the metal’s value in the short- and long-term: the ballooning U.S. debt and the record-low yields, both domestic and global.

In his analysis, Holmes points to some very concerning statistics regarding domestic debt. The federal budget deficit for the 2020 fiscal year has passed $1 trillion, an unprecedented development during a time of perceived economic stability. The figure goes in line with the constantly expanding U.S. national debt, which now sits at $22.5 trillion. Holmes is also wary of the latest estimate by the Congressional Budget Office (CBO), which forecasts a federal debt amounting to 144% of local GDP by 2049.

Regarding yields, it’s well-known that many top economies have sunk their bonds into low or negative territory, and the landscape looks very much alike on the corporate side. This has revived the issue of corporate debt, which was a major ingredient in the 2008 financial crisis. Large companies made full use of all-time low yields for corporate bonds, as they rushed to borrow as much money as they could. As Holmes notes, giants like Apple and Coca-Cola have been among the record 49 companies to borrow a combined $54 billion through the past Wednesday.

In regards to central banks, Holmes cites Rick Rieder, chief investment officer at BlackRock, who believes that the official sector has entered something he calls the “monetary policy endgame”. Recent years have shown that central bankers have no qualms about slicing rates into negative territory and employing as much quantitative easing (QE) as they wish. The latter point has sparked talks about currency debasement, with many investors feeling that previously-marquee fiat currencies are no longer instilling the confidence that they once did.

Rieder and Holmes agree that we are approaching an era where negative-yielding bonds and zero-yielding currencies will become the norm, each of the two being in infinite supply. In such an environment, investors will have to look elsewhere to protect themselves from an incoming global financial crisis.

Holmes has little doubt that gold is among the best asset to do just that. Its independence and cherished scarcity make it an ideal choice of a shield against dubious government policies. Yet gold offers more than just the assurance of wealth protection. While the metal recently sparked above $1,500 an ounce in spectacular fashion, Holmes thinks that the callous actions of central bankers, especially in regards to currency debasement, could bring its price to $10,000 an ounce in the coming years.

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